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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 2, 2022
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number: 001-38854
ktb-20220402_g1.jpg
KONTOOR BRANDS, INC.
(Exact name of registrant as specified in its charter)
North Carolina83-2680248
(State or other jurisdiction of incorporation or organization)(I.R.S. employer identification number)

400 N. Elm Street
Greensboro, North Carolina 27401
(Address of principal executive offices)

(336) 332-3400
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading symbol(s)Name of each exchange on which registered
Common Stock, no par valueKTBNew York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.     Yes þ    No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes þ    No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filerAccelerated filerNon-accelerated filerSmaller reporting companyEmerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes    No þ 
The number of shares of Common Stock of the registrant outstanding as of April 29, 2022 was 56,024,103.



KONTOOR BRANDS, INC.
Table of Contents
 Page

Kontoor Brands, Inc. Q1 FY22 Form 10-Q 2



PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)

KONTOOR BRANDS, INC.
Consolidated Balance Sheets
(Unaudited)
(In thousands, except share amounts)March 2022December 2021March 2021
ASSETS
Current assets
Cash and cash equivalents$193,630 $185,322 $229,542 
Accounts receivable, net 276,037 289,800 221,031 
Inventories432,891 362,957 350,151 
Prepaid expenses and other current assets82,495 72,579 74,003 
Total current assets985,053 910,658 874,727 
Property, plant and equipment, net101,380 105,155 113,693 
Operating lease assets47,759 54,950 65,478 
Intangible assets, net14,248 14,638 15,544 
Goodwill211,504 212,213 212,920 
Other assets229,110 235,410 237,313 
TOTAL ASSETS$1,589,054 $1,533,024 $1,519,675 
LIABILITIES AND EQUITY
Current liabilities
Short-term borrowings$239 $249 $947 
Current portion of long-term debt2,500  24,375 
Accounts payable266,974 214,204 194,891 
Accrued liabilities198,777 217,164 184,047 
Operating lease liabilities, current22,563 24,195 28,473 
Total current liabilities491,053 455,812 432,733 
Operating lease liabilities, noncurrent26,511 32,993 42,843 
Other liabilities98,257 104,764 118,905 
Long-term debt789,143 791,317 790,930 
Commitments and contingencies
Total liabilities1,404,964 1,384,886 1,385,411 
Equity
Preferred Stock, no par value; shares authorized, 90,000,000; no shares outstanding at March 2022, December 2021 and March 2021
   
Common Stock, no par value; shares authorized, 600,000,000; shares outstanding of 56,276,243 at March 2022; 56,381,466 at December 2021 and 57,513,619 at March 2021
   
Additional paid-in capital224,721 218,259 186,769 
Retained earnings43,066 22,635 44,192 
Accumulated other comprehensive loss(83,697)(92,756)(96,697)
Total equity
184,090 148,138 134,264 
TOTAL LIABILITIES AND EQUITY$1,589,054 $1,533,024 $1,519,675 
See accompanying notes to unaudited consolidated financial statements.

3 Kontoor Brands, Inc. Q1 FY22 Form 10-Q


KONTOOR BRANDS, INC.
Consolidated Statements of Operations
(Unaudited)
Three Months Ended March
(In thousands, except per share amounts)20222021
Net revenues $679,743 $651,762 
Costs and operating expenses
Cost of goods sold375,122 351,182 
Selling, general and administrative expenses196,400 207,404 
Total costs and operating expenses571,522 558,586 
Operating income108,221 93,176 
Interest expense(8,023)(11,791)
Interest income469 258 
Other expense, net(222)(442)
Income before income taxes100,445 81,201 
Income taxes19,635 16,738 
Net income$80,810 $64,463 
Earnings per common share
Basic$1.43 $1.12 
Diluted$1.40 $1.09 
Weighted average shares outstanding
Basic56,321 57,344 
Diluted57,836 58,902 
See accompanying notes to unaudited consolidated financial statements.



Kontoor Brands, Inc. Q1 FY22 Form 10-Q 4



KONTOOR BRANDS, INC.
Consolidated Statements of Comprehensive Income
(Unaudited)
 Three Months Ended March
(In thousands)20222021
Net income$80,810 $64,463 
Other comprehensive income (loss)
Net change in foreign currency translation(3,615)(7,082)
Net change in defined benefit pension plans6 74 
Net change in derivative financial instruments12,668 5,118 
Total other comprehensive income (loss), net of related taxes9,059 (1,890)
Comprehensive income$89,869 $62,573 
See accompanying notes to unaudited consolidated financial statements.

5 Kontoor Brands, Inc. Q1 FY22 Form 10-Q


KONTOOR BRANDS, INC.
Consolidated Statements of Cash Flows
(Unaudited)
 Three Months Ended March
(In thousands)20222021
OPERATING ACTIVITIES
Net income$80,810 $64,463 
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization9,862 8,993 
Stock-based compensation5,730 10,426 
Provision for doubtful accounts1,757 1,386 
Other3,422 2,977 
Changes in operating assets and liabilities:
Accounts receivable9,990 5,871 
Inventories(70,183)(11,131)
Accounts payable54,109 28,604 
Income taxes12,201 6,983 
Accrued liabilities(34,642)(191)
Other assets and liabilities1,777 4 
Cash provided by operating activities74,833 118,385 
INVESTING ACTIVITIES
Property, plant and equipment expenditures(2,885)(1,992)
Capitalized computer software(2,112)(9,568)
Other(31)(201)
Cash used by investing activities(5,028)(11,761)
FINANCING ACTIVITIES
Repayments of term loans (100,000)
Repurchases of Common Stock(22,513) 
Dividends paid(26,033)(22,964)
Shares withheld for taxes, net of proceeds from issuance of Common Stock(11,102)(412)
Other(298)(125)
Cash used by financing activities(59,946)(123,501)
Effect of foreign currency rate changes on cash and cash equivalents(1,551)(1,719)
Net change in cash and cash equivalents 8,308 (18,596)
Cash and cash equivalents – beginning of period185,322 248,138 
Cash and cash equivalents – end of period$193,630 $229,542 
See accompanying notes to unaudited consolidated financial statements.

Kontoor Brands, Inc. Q1 FY22 Form 10-Q 6



KONTOOR BRANDS, INC.
Consolidated Statements of Equity
(Unaudited)
Common StockAdditional Paid-in CapitalRetained EarningsAccumulated Other Comprehensive LossTotal Equity
 (In thousands, except per share amounts)SharesAmounts
Balance, December 202156,381 $ $218,259 $22,635 $(92,756)$148,138 
Net income— — — 80,810 — 80,810 
Stock-based compensation, net387 — 6,462 (11,833)— (5,371)
Other comprehensive income— — — — 9,059 9,059 
Dividends on Common Stock ($0.46 per share)
— — — (26,033)— (26,033)
Repurchases of Common Stock(492)— — (22,513)— (22,513)
Balance, March 202256,276 $ $224,721 $43,066 $(83,697)$184,090 
Common StockAdditional Paid-in CapitalRetained EarningsAccumulated Other Comprehensive LossTotal Equity
 (In thousands, except per share amounts)SharesAmounts
Balance, December 202057,255 $ $172,297 $7,151 $(94,807)$84,641 
Net income— — — 64,463 — 64,463 
Stock-based compensation, net259 — 14,472 (4,458)— 10,014 
Other comprehensive loss— — — — (1,890)(1,890)
Dividends on Common Stock ($0.40 per share)
— — — (22,964)— (22,964)
Balance, March 202157,514 $ $186,769 $44,192 $(96,697)$134,264 
See accompanying notes to unaudited consolidated financial statements.

7 Kontoor Brands, Inc. Q1 FY22 Form 10-Q


KONTOOR BRANDS, INC.
Notes to Consolidated Financial Statements
(Unaudited)

NOTE 1 — BASIS OF PRESENTATION
Description of Business
Kontoor Brands, Inc. ("Kontoor," the "Company," "we," "us" or "our") is a global lifestyle apparel company headquartered in the United States ("U.S."). The Company designs, produces, procures, markets and distributes apparel primarily under the brand names Wrangler® and Lee®. The Company's products are sold in the U.S. through mass merchants, specialty stores, mid-tier and traditional department stores, company-operated stores and online. The Company's products are also sold internationally, primarily in the Europe, Middle East and Africa ("EMEA") and Asia-Pacific ("APAC") regions, through department, specialty, company-operated, concession retail and independently operated partnership stores and online.
Fiscal Year
The Company operates and reports using a 52/53-week fiscal year ending on the Saturday closest to December 31 of each year. Accordingly, this Form 10-Q presents the first quarter of the Company's fiscal year ending December 31, 2022 ("fiscal 2022"), which is a 52-week fiscal year. For presentation purposes herein, all references to periods ended March 2022, December 2021 and March 2021 correspond to the fiscal periods ended April 2, 2022, January 1, 2022 and April 3, 2021, respectively.
Impact of COVID-19 and Other Recent Developments
The novel coronavirus (“COVID-19”) pandemic continues to impact global economic conditions, as well as the Company's operations. Additionally, although we do not have any significant operations within Russia or Ukraine, the conflict in these regions has caused disruption in the surrounding areas and greater uncertainty in the global economy. The Company considered the impact of these developments on the assumptions and estimates used when preparing these quarterly financial statements including, but not limited to, our allowance for doubtful accounts, inventory valuations, liabilities for variable consideration, deferred tax valuation allowances, fair value measurements including asset impairment evaluations, the effectiveness of the Company’s hedging instruments, and expected compliance with all applicable financial covenants in our Credit Agreement (as defined in Note 6 to the Company's financial statements). These assumptions and estimates may change as new events occur and additional information is obtained regarding the impact of COVID-19 and the Russia-Ukraine conflict. Such future changes may have an adverse impact on the Company's results of operations, financial position and liquidity.
Basis of Presentation - Interim Financial Statements
The accompanying unaudited interim financial statements have been prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X and do not include all of the information and notes required by generally accepted accounting principles in the U.S. ("GAAP") for complete financial statements. In the opinion of management, the accompanying financial statements contain all normal and recurring adjustments necessary to fairly state the financial position, results of operations and cash flows of the Company for the interim periods presented. Operating results for the three months ended March 2022 are not necessarily indicative of results that may be expected for any other interim period or for fiscal 2022. The unaudited financial statements should be read in conjunction with the audited consolidated and combined financial statements included in the Company's 2021 Annual Report on Form 10-K for the fiscal year ended January 1, 2022, as filed with the Securities and Exchange Commission ("SEC") on March 2, 2022 ("2021 Annual Report on Form 10-K").
Recently Issued Accounting Standard
In March 2020, the FASB issued ASU 2020-04, “Facilitation of the Effects of Reference Rate Reform on Financial Reporting,” which is intended to provide temporary optional expedients and exceptions for applying GAAP to contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate ("LIBOR") and other interbank offered rates to alternative reference rates. This guidance was effective upon issuance and the Company may adopt the guidance and apply it prospectively to contract modifications made or relationships entered into or evaluated any time from the issuance date through December 31, 2022. The Company will continue to evaluate the impact that adoption of this guidance would have on its financial statements and related disclosures, most notably the Company's credit facilities and interest rate swap agreements, which is not expected to be significant.


Kontoor Brands, Inc. Q1 FY22 Form 10-Q 8



KONTOOR BRANDS, INC.
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 2 — REVENUES
Contract Balances and Performance Obligations
The following table presents information about contract balances recorded in the Company's balance sheets:
(In thousands)March 2022December 2021March 2021
Accounts receivable, net$276,037 $289,800 $221,031 
Contract assets (a)
4,311 3,093 4,359 
Contract liabilities (b)
1,787 2,258 786 
(a) Included within "prepaid expenses and other current assets" in the Company's balance sheets.
(b) Included within "accrued liabilities" in the Company's balance sheets.
For the three months ended March 2022 and March 2021, revenue recognized that was included in contract liabilities as of December 2021 and December 2020, respectively, was not significant.
As of March 2022, the Company has contractual rights under its licensing agreements to receive $27.5 million of fixed consideration related to the future minimum guarantees through December 2027. As of March 2022, there were no arrangements with any transaction price allocated to remaining performance obligations other than (i) contracts for which the Company has applied the practical expedients and (ii) fixed consideration related to future minimum guarantees. For the three months ended March 2022, revenue recognized from performance obligations satisfied, or partially satisfied, in prior periods was not significant. The variable consideration under these arrangements is not disclosed as a remaining performance obligation as the licensing arrangements qualify for the sales-based royalty exemption.
Disaggregation of Revenue
The following tables present revenues disaggregated by channel and geography. Revenues from licensing arrangements have been included within the U.S. or Non-U.S. Wholesale channels, based on the respective region where the licensee sells the product. Direct-to-Consumer revenues include the distribution of our products via Wrangler® and Lee® branded full-price stores and company-operated outlet stores, digital sales at www.wrangler.com and www.lee.com and international concession arrangements.
Other primarily includes other revenue sources, including sales and licensing of Rock & Republic® apparel. Other also included sales of third-party branded merchandise at company owned outlet stores through the first quarter of 2021.
Three Months Ended March 2022
(In thousands)WranglerLeeOtherTotal
Channel revenues
U.S. Wholesale$330,652 $136,806 $2,527 $469,985 
Non-U.S. Wholesale52,819 91,051 501 144,371 
Direct-to-Consumer28,952 36,363 72 65,387 
Total$412,423 $264,220 $3,100 $679,743 
Geographic revenues
U.S.$354,393 $150,116 $2,599 $507,108 
International58,030 114,104 501 172,635 
Total$412,423 $264,220 $3,100 $679,743 


9 Kontoor Brands, Inc. Q1 FY22 Form 10-Q


KONTOOR BRANDS, INC.
Notes to Consolidated Financial Statements
(Unaudited)
Three Months Ended March 2021
(In thousands)WranglerLeeOtherTotal
Channel revenues
U.S. Wholesale$329,699 $124,582 $1,726 $456,007 
Non-U.S. Wholesale47,577 90,800 637 139,014 
Direct-to-Consumer21,546 34,766 5 56,317 
Other  424 424 
Total$398,822 $250,148 $2,792 $651,762 
Geographic revenues
U.S.$347,879 $138,232 $2,155 $488,266 
International50,943 111,916 637 163,496 
Total$398,822 $250,148 $2,792 $651,762 
NOTE 3 — BUSINESS SEGMENT INFORMATION
The Company has two reportable segments:
Wrangler — Wrangler® branded denim, apparel and accessories.
Lee — Lee® branded denim, apparel and accessories.
The chief operating decision maker allocates resources and assesses performance based on a global brand view which determines the Company's operating segments. Operating segments are the basis for the Company's reportable segments.
In addition, we report an "Other" category in order to reconcile segment revenues and segment profit to the Company's operating results, but the Other category is not considered a reportable segment based on evaluation of aggregation criteria. Other primarily includes other revenue sources, including sales and licensing of Rock & Republic® apparel.
Accounting policies utilized for internal management reporting at the individual segments are consistent with those disclosed in the Company's 2021 Annual Report on Form 10-K. Corporate and other expenses and interest income and expense are not controlled by segment management and therefore are excluded from the measurement of segment profit.
The following table presents financial information for the Company's reportable segments and income before income taxes:
 Three Months Ended March
(In thousands)20222021
Segment revenues:
Wrangler$412,423 $398,822 
Lee264,220 250,148 
Total reportable segment revenues676,643 648,970 
Other revenues 3,100 2,792 
Total net revenues$679,743 $651,762 
Segment profit:
Wrangler$75,388 $83,983 
Lee52,230 51,123 
Total reportable segment profit$127,618 $135,106 
Corporate and other expenses(19,982)(41,551)
Interest expense(8,023)(11,791)
Interest income469 258 
Profit (loss) related to other revenues363 (821)
Income before income taxes$100,445 $81,201 


Kontoor Brands, Inc. Q1 FY22 Form 10-Q 10



KONTOOR BRANDS, INC.
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 4 — ACCOUNTS RECEIVABLE
Allowance for Doubtful Accounts
The Company reviews the estimates used to calculate the allowance for doubtful accounts on a quarterly basis.
The following table presents a rollforward of the allowance for doubtful accounts:
Three Months Ended March
(In thousands)20222021
Balance, December$11,705 $19,143 
Provision for expected credit losses1,757 1,386 
Accounts receivable balances written off (1)
(153)(2,122)
Other (2)
(284)(735)
Balance, March$13,025 $17,672 
(1) Accounts receivable balances written off against the allowance were primarily due to the exit of our India business during 2021.
(2) Other primarily includes the impact of foreign currency translation and recoveries of amounts previously written off, none of which were individually significant.
Sale of Trade Accounts Receivable
The Company is party to an agreement with a financial institution to sell selected trade accounts receivable on a nonrecourse basis. Under this agreement, up to $377.5 million of the Company’s trade accounts receivable may be sold to the financial institution and remain outstanding at any point in time. The Company removes the sold balances from "accounts receivable, net" in its balance sheet at the time of sale. The Company does not retain any interests in the sold trade accounts receivable but continues to service and collect outstanding trade accounts receivable on behalf of the financial institution.
During the three months ended March 2022 and March 2021, the Company sold total trade accounts receivable of $355.5 million and $370.5 million, respectively. As of March 2022, December 2021 and March 2021, $227.0 million, $170.6 million and $242.1 million, respectively, of the sold trade accounts receivable had been removed from the Company's balance sheets but remained outstanding with the financial institution.
The funding fees charged by the financial institution for this program are reflected in the Company's statements of operations within "other expense, net" and were $0.6 million for both the three months ended March 2022 and March 2021. Net proceeds of this program are reflected as operating activities in the Company's statements of cash flows.

NOTE 5 — INVENTORIES
The following table presents components of "inventories" recorded in the Company's balance sheets:
(In thousands)March 2022December 2021March 2021
Finished products$346,160 $293,427 $291,972 
Work-in-process40,310 32,346 29,104 
Raw materials46,421 37,184 29,075 
Total inventories$432,891 $362,957 $350,151 

NOTE 6 — SHORT-TERM BORROWINGS AND LONG-TERM DEBT
Short-term Borrowings
At March 2022, December 2021 and March 2021, the Company had $10.0 million, $10.1 million and $35.9 million, respectively, of borrowing availability under international lines of credit with various banks, which are uncommitted and may be terminated at any time by either the Company or the banks. There were no outstanding balances under these arrangements at March 2022 and December 2021, and $0.1 million at March 2021, which primarily consisted of letters of credit that are non-interest bearing to the Company. In addition, short-term borrowings at March 2022, December 2021 and March 2021 included other debt of $0.2 million, $0.2 million and $0.9 million, respectively.

11 Kontoor Brands, Inc. Q1 FY22 Form 10-Q


KONTOOR BRANDS, INC.
Notes to Consolidated Financial Statements
(Unaudited)
Long-term Debt
The following table presents the components of long-term debt as recorded in the Company's balance sheets:
(In thousands)March 2022December 2021March 2021
Revolving Credit Facility$ $ $ 
Term Loan A397,559 397,427 684,741 
Term Loan B  130,564 
4.125% Notes, due 2029
394,084 393,890  
Total long-term debt791,643 791,317 815,305 
Less: current portion(2,500) (24,375)
Long-term debt, due beyond one year$789,143 $791,317 $790,930 
Credit Facilities
On November 18, 2021, the Company completed a refinancing pursuant to which it issued $400.0 million of Notes (as defined below) and amended and restated its Credit Agreement (the “Credit Agreement”). The Credit Agreement provides for (i) a five-year $400.0 million term loan A facility (“Term Loan A”), with mandatory repayments beginning in March 2023 and (ii) a five-year $500.0 million revolving credit facility (the “Revolving Credit Facility”) (collectively, the “Credit Facilities”) with the lenders and agents party thereto. The net proceeds from the offering of the Notes, together with $7.6 million of cash on hand, were used to repay $265.0 million of the principal amount outstanding under the then existing term loan A, and all of the $133.0 million principal amount outstanding under term loan B.
The Term Loan A had an outstanding principal amount of $400.0 million at both March 2022 and December 2021, and at March 2021, the then existing term loan A facility had an outstanding principal amount of $690.0 million. These balances are reported net of unamortized deferred financing costs. As of March 2022, interest expense on Term Loan A was being recorded at an effective annual interest rate of 3.0%, including the amortization of deferred financing costs and the impact of the Company’s interest rate swap.
The Revolving Credit Facility may be used to borrow funds in both U.S. dollar and certain non-U.S. dollar currencies, and has a $75.0 million letter of credit sublimit. As of March 2022, the Company had no outstanding borrowings under the Revolving Credit Facility and $13.1 million of outstanding standby letters of credit issued on behalf of the Company, leaving $486.9 million available for borrowing against this facility.
The interest rate per annum applicable to the Credit Agreement is an interest rate benchmark elected by the Company based on the currency and term of the borrowing plus an applicable margin, as defined therein.
The Credit Agreement contains certain affirmative and negative covenants customary for financings of this type as well as customary events of default. In addition, the Credit Agreement contains financial covenants which require compliance with (i) a total leverage ratio not to exceed 4.50 to 1.00 as of the last day of any test period, with an allowance for up to two elections to increase the limit to 5.00 to 1.00 in connection with certain material acquisitions, and (ii) a consolidated interest coverage ratio as of the last day of any test period to be no less than 3.00 to 1.00. As of March 2022, the Company was in compliance with all financial covenants and expects to maintain compliance with the applicable financial covenants for at least one year from the issuance of these financial statements.
Senior Notes
On November 18, 2021, the Company entered into an indenture (the “Indenture”) by and among the Company and certain subsidiaries of the Company named as guarantors therein (the “Guarantors”), pursuant to which it issued $400.0 million of unsecured senior notes due November 2029 (the “Notes”) through a private placement pursuant to Rule 144A and Regulation S under the Securities Act of 1933, as amended. The Notes bear interest at a fixed rate of 4.125% per annum, payable in cash in arrears on May 15 and November 15 of each year, commencing on May 15, 2022.
The Notes had an outstanding principal amount of $400.0 million at both March 2022 and December 2021, which is reported net of unamortized deferred financing costs. As of March 2022, interest expense on the Notes was being recorded at an effective annual interest rate of 4.3%, including the amortization of deferred financing costs.
The Notes are guaranteed on a senior unsecured basis by the Company’s existing and future domestic subsidiaries (other than certain excluded subsidiaries) that are borrowers under or guarantors of the Credit Facilities or certain other indebtedness. The Indenture governing the Notes contains customary negative covenants for financings of this type. The Indenture does not contain any financial covenants. As of March 2022, the Company was in compliance with the Indenture.
Refer to Note 10 in the Company's 2021 Annual Report on Form 10-K for additional information regarding the Company’s debt obligations.

Kontoor Brands, Inc. Q1 FY22 Form 10-Q 12



KONTOOR BRANDS, INC.
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 7 — FAIR VALUE MEASUREMENTS
Certain assets and liabilities measured and reported at fair value are classified in a three-level hierarchy that prioritizes the inputs used in the valuation process. Categorization within the valuation hierarchy is based on the lowest level of any input that is significant to the fair value measurement. The hierarchy is based on the observability and objectivity of the pricing inputs, as follows:
Level 1 — Quoted prices in active markets for identical assets or liabilities.
Level 2 — Significant directly observable data (other than Level 1 quoted prices) or significant indirectly observable data through corroboration with observable market data. Inputs would normally be (i) quoted prices in active markets for similar assets or liabilities, (ii) quoted prices in inactive markets for identical or similar assets or liabilities or (iii) information derived from or corroborated by observable market data.
Level 3 — Prices or valuation techniques that require significant unobservable data inputs. These inputs would normally be the Company's own data and judgments about assumptions that market participants would use in pricing the asset or liability.
Recurring Fair Value Measurements
The following tables present financial assets and financial liabilities that are measured and recorded in the Company's financial statements at fair value on a recurring basis:
 Fair Value Measurement Using
(In thousands)Total Fair ValueLevel 1Level 2Level 3
March 2022
Financial assets:
Cash equivalents:
Money market funds$78,680 $78,680 $ $ 
Time deposits2,653 2,653   
Foreign currency exchange contracts11,172  11,172  
Interest rate swap agreements4,309  4,309  
Investment securities55,559 55,559   
Financial liabilities:
Foreign currency exchange contracts1,075  1,075  
Deferred compensation56,661  56,661  
 Fair Value Measurement Using
(In thousands)Total Fair ValueLevel 1Level 2Level 3
December 2021
Financial assets:
Cash equivalents:
Money market funds$110,050 $110,050 $ $ 
Time deposits3,644 3,644   
Foreign currency exchange contracts7,321  7,321  
Investment securities57,613 57,613   
Financial liabilities:
Foreign currency exchange contracts1,972  1,972  
Interest rate swap agreements6,052  6,052  
Deferred compensation58,791  58,791  

13 Kontoor Brands, Inc. Q1 FY22 Form 10-Q


KONTOOR BRANDS, INC.
Notes to Consolidated Financial Statements
(Unaudited)
The Company's cash equivalents include money market funds and short-term time deposits that approximate fair value based on Level 1 measurements. The fair value of derivative financial instruments, which consist of foreign currency exchange contracts and interest rate swap agreements, is determined based on observable market inputs (Level 2), including spot and forward exchange rates for foreign currencies and observable interest rate yield curves for interest rate swap agreements. Investment securities are held in the Company's deferred compensation plans as an economic hedge of the related deferred compensation liabilities and are comprised of mutual funds that are valued based on quoted prices in active markets (Level 1). Liabilities related to the Company's deferred compensation plans are recorded at amounts due to participants, based on the fair value of the participants’ selection of hypothetical investments (Level 2).
Additionally, at March 2022, the carrying value of the Company's long-term debt was $791.6 million compared to a fair value of $758.0 million. At December 2021, the carrying value of the Company's long-term debt was $791.3 million compared to a fair value of $797.5 million. The fair value of long-term debt is a Level 2 estimate based on quoted market prices or values of comparable borrowings.
All other financial assets and financial liabilities are recorded in the Company's financial statements at cost. These other financial assets and financial liabilities include cash held as demand deposits, accounts receivable, short-term borrowings, accounts payable, and accrued liabilities. At March 2022 and December 2021, their carrying values approximated fair value due to the short-term nature of these instruments.

NOTE 8 — DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
Summary of Derivative Financial Instruments
The Company enters into derivative contracts with external counterparties to hedge certain foreign currency transactions. The notional amount of all outstanding foreign currency exchange contracts was $287.5 million at March 2022, $297.4 million at December 2021 and $304.3 million at March 2021, consisting primarily of contracts hedging exposures to the euro, Mexican peso, Canadian dollar, British pound, Polish zloty and Swedish krona. Foreign currency exchange contracts have maturities up to 20 months.
During 2019, the Company entered into "floating to fixed" interest rate swap agreements to mitigate exposure to volatility in LIBOR rates on the Company's future interest payments. The notional amount of the interest rate swap agreements was $300.0 million at March 2022 and $350.0 million at both December 2021 and March 2021. Because these interest rate swap agreements meet the criteria for hedge accounting, all related gains and losses are deferred within accumulated other comprehensive loss ("AOCL") and are being amortized through April 18, 2024.
The Company's outstanding derivative financial instruments met the criteria for hedge accounting at the inception of the hedging relationship. At each reporting period, the Company assesses whether the hedging relationships continue to be highly effective in offsetting changes in cash flows of hedged items. If the Company determines that a specific hedging relationship has ceased to be highly effective, it would discontinue hedge accounting. All designated hedging relationships were determined to be highly effective as of March 2022. A limited number of foreign currency exchange contracts intended to hedge assets and liabilities are not designated as hedges for accounting purposes.
The following table presents the fair value of outstanding derivatives on an individual contract basis:
Fair Value of Derivatives
with Unrealized Gains
Fair Value of Derivatives
with Unrealized Losses
MarchDecemberMarchMarchDecemberMarch
(In thousands)202220212021202220212021
Derivatives designated as hedging instruments:
Foreign currency exchange contracts$11,041 $7,321 $6,593 $(1,073)$(1,972)$(4,659)
Interest rate swap agreements4,309    (6,052)(12,710)
Derivatives not designated as hedging instruments:
Foreign currency exchange contracts131  221 (2) (3)
Total derivatives$15,481 $7,321 $6,814 $(1,075)$(8,024)$(17,372)

Kontoor Brands, Inc. Q1 FY22 Form 10-Q 14



KONTOOR BRANDS, INC.
Notes to Consolidated Financial Statements
(Unaudited)
The Company records and presents the fair value of all derivative assets and liabilities in the Company's balance sheets on a gross basis, even though certain derivative contracts are subject to master netting agreements. If the Company were to offset and record the asset and liability balances of its derivative contracts on a net basis in accordance with the terms of its master netting agreements, the amounts presented in the Company's balance sheets would be adjusted from the current gross presentation to the net amounts.
The following table presents a reconciliation of gross to net amounts for derivative asset and liability balances:
March 2022December 2021March 2021
(In thousands)Derivative AssetDerivative LiabilityDerivative AssetDerivative LiabilityDerivative AssetDerivative
Liability
Gross amounts presented in the balance sheet$15,481 $(1,075)$7,321 $(8,024)$6,814 $(17,372)
Gross amounts not offset in the balance sheet(938)938 (1,636)1,636 (2,355)2,355 
Net amounts$14,543 $(137)$5,685 $(6,388)$4,459 $(15,017)
The following table presents the location of derivatives in the Company's balance sheets, with current or noncurrent classification based on maturity dates:
(In thousands)March 2022December 2021March 2021
Prepaid expenses and other current assets$9,424 $6,356 $5,830 
Accrued liabilities(838)(1,623)(4,065)
Other assets6,057 965 984 
Other liabilities(237)(6,401)(13,307)
Cash Flow Hedges
The following tables present the pre-tax effects of cash flow hedges included in the Company's statements of operations and statements of comprehensive income:
Gain on Derivatives Recognized in AOCL
(In thousands)Three Months Ended
Cash Flow Hedging RelationshipsMarch 2022March 2021
Foreign currency exchange contracts$7,325 $1,546 
Interest rate swap agreements9,095 2,086 
Total$16,420 $3,632 
Gain (Loss) Reclassified from AOCL into Income
(In thousands)Three Months Ended
Location of Gain (Loss)March 2022March 2021
Net revenues$(132)$75 
Cost of goods sold2,301 (1,405)
Other expense, net(103)(134)
Interest expense(1,266)(1,513)
Total$800 $(2,977)


15 Kontoor Brands, Inc. Q1 FY22 Form 10-Q


KONTOOR BRANDS, INC.
Notes to Consolidated Financial Statements
(Unaudited)
Derivative Contracts Not Designated as Hedges
Contracts that are not designated as hedges and are recorded at fair value in the Company's balance sheets primarily relate to derivatives contracts used by the Company to manage foreign currency exchange risk on certain accounts receivable and accounts payable. Gains or losses on the balance sheet contracts largely offset the net transaction gains or losses on the related assets and liabilities. In addition, a limited number of cash flow hedges were deemed ineffective and de-designated. Changes in the fair values of derivative contracts not designated as hedges are recognized directly in earnings.
The following table presents a summary of these derivatives included in the Company's statements of operations:
Location of Gain (Loss) on Derivatives Recognized in IncomeGain (Loss) on Derivatives Recognized in Income
(In thousands)Three Months Ended
Derivatives Not Designated as HedgesMarch 2022March 2021
Foreign currency exchange contractsNet revenues$ $(81)
Cost of goods sold6 (123)
Other expense, net 209 
Total$6 $5 
Other Derivative Information
There were no significant amounts recognized in earnings for the ineffective portion of any hedging relationships during the three months ended March 2022 and March 2021.
At March 2022, AOCL included $10.0 million of pre-tax net deferred gains for foreign currency exchange contracts and interest rate swap agreements that are expected to be reclassified to earnings during the next 12 months. The amounts ultimately reclassified to earnings will depend on rates in effect when outstanding derivative contracts are settled.

NOTE 9 — CAPITAL AND ACCUMULATED OTHER COMPREHENSIVE LOSS
Common Stock
During the three months ended March 2022, the Company repurchased